Why Discount Retail Stocks Are Best

Looking at retail? Want the sure-bet plays? My investment advice and best stock advice to you would be to stick with the leading discount bellwether retail stocks, such as Wal-Mart Stores, Inc. (NYSE/WMT) and Costco Wholesale Corporation (NASDAQ/COST). However, for that extra bit of growth, you need to look at the smaller discount retail companies. Looking at retail? Want the sure-bet plays? My investment advice and best stock advice to you would be to stick with the leading discount bellwether retail stocks, such as Wal-Mart Stores, Inc. (NYSE/WMT) and Costco Wholesale Corporation (NASDAQ/COST).

Costco delivered $348 million, or $0.79 per diluted share, in its fiscal second quarter, up from $299 million in the comparative fiscal second quarter in 2010.

Revenue growth was 11% year-over-year to $20.88 billion, above the consensus estimate of $20.4 billion. The results are consistent and continue to show steady growth; however, for that extra bit of growth, you need to look at the smaller discount retail companies.

Costco, for instance, has a market cap of $32.12 billion and is estimated to report sales growth of 10.6% and 7.9% for the FY11 and FY12, respectively.

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In contrast, take a look at small-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of 28 warehouse clubs in Central America and the Caribbean. PriceSmart reported a booming 18.5% increase in its same-store sales for the five weeks to March 6, along with a 23.6% year-over-year rise in February net sales. These are strong metrics. Also consider the comparative sales growth for PriceSmart, which are 13.9% and 8.7%, for the FY11 and FY12, respectively. The growth estimates are probably conservative and could really take off if the expansion continues.

Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operated a staggering 8,877 stores across 35 states as of February 26, 2010. Dollar General has reasonable valuation and above-average price appreciation potential for investors.

So, while we wait for February’s retail sales on March 11, we’re definitely seeing increased consumer spending, as jobs are generated and consumers feel more secure. Economists are estimating a 0.6% rise in retail sales in February ex-auto, up from 0.3% in January.

And when housing picks up, I expect spending to continue to increase, especially on non-essential goods and services reflected by Durable Goods.

It does appear that a reversal is occurring in retailing. The key is to look for same-store sales growth in retailers that sell non-essential goods. Increases here could mean that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items.

My favorite in the retail space continues to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product lines. This will offer consumers a one-stop place for shopping and make more money for these companies.